While U.S. natural gas prices rose slightly in 2018, according to the Federal Energy Regulatory Commission’s latest State of the Markets Report, lack of pipeline capacity in the Permian Basin in west Texas and eastern New Mexico led to substantially lower prices. During a presentation at the FERC’s April 18 public meeting, Staff noted that the inability to move all of the gas produced in the basin to markets resulted in negative prices. In other words, producers were unable to sell the gas because they couldn’t get it to buyers.
While still at historically low levels, the FERC analysis found, “U.S. natural gas spot prices generally rose in 2018 from 2017, with the Henry Hub averaging $3.12/MMBtu for the year, up 5 percent from $2.96/MMBtu in 2017.” In the Permian, where the primary play is oil and gas is a secondary product, “Gas prices in the region averaged $1.95/MMBtu during 2018, a 27 percent decrease from 2017, and fell as low as $0.45/MMBtu in late November.”
Early this month, Bloomberg reported, “Natural gas prices in West Texas extended their plunge into negative territory through Tuesday, posing a challenge for crude producers in the Permian, the world’s largest oil basin. Drillers must now pay customers to take away gas, a byproduct of crude production, as pipeline constraints keep supply trapped in the region. That adds to costs and may tempt explorers to burn off the excess fuel, a practice frowned upon by both regulators and environmentalists.”
FERC report noted that high demand for gas, particularly in the summer, now the leading fuel for U.S. electric generation, drove up prices: “During the summer, natural gas demand reached record highs, but was met with record high production, tempering prices during the third quarter of 2018.” That’s because summer is air conditioning season in most of the U.S., leading to increased electric generation.
The high demand and higher gas prices had a down side, according to FERC. “However, the record high demand kept storage from filling at its typical rate. The diminished storage backstop caused fourth quarter prices across the country to surge, with the Henry Hub price up 31 percent compared to the fourth quarter of 2017.”
On the electric side of FERC’s agenda, prices for power generally increased. “In 2018, mean day-ahead on-peak locational marginal prices (LMPs) increased, on average as compared to 2017,” FERC reported, “nearly 25 percent at pricing nodes throughout the national RTO/ISO footprint.” The Southwest Power Pool, the Midcontinent Independent System Operator, and the California Independent System Operator “experienced moderate increases in average day-ahead on-peak LMP, with increases less than 15 percent relative to 2017 levels.”
The biggest wholesale price increases came in the Independent System Operator New England (33 percent) and the Electric Reliability Council of Texas (44 percent). Electricity price changes largely reflected discrete circumstances, not fundamental market changes. FERC said, “Electricity demand, as measured by retail sales of electricity, remained stable in 2018, although 2018 recorded the highest annual amount during the last five years. Total retail sales across all sectors have remained steady since 2015, when accounting for differences in weather and increased economic activity.”
The FERC analysis also highlighted progress in the Western Energy Imbalance Market (EIM), which appears to be evolving into a region-wide wholesale market. FERC said, “Based on CAISO estimates, the EIM produced over $500 million in gross benefits to its members between its inception in November 2014 and the end of 2018, in the form of reduced overall costs from fewer renewables curtailments and lower reserve requirements.”
During 2018, Idaho Power Corp., and Powerex (a subsidiary of Canada’s BC Hydro), joined the EIM. Sacramento Municipal Utility District, a large public power system, joined this year. GTeh FERC report said, “During the third quarter of 2018, CAISO estimated that the EIM generated over $100 million in gross benefits for its members, the most in any quarter since the EIM began, largely by integrating renewables during periods of high natural gas prices.”
— Kennedy Maize